Employment Tax Liability and the Trust Fund Recovery Penalty

Sometimes small-business owners face a difficult choice: pay employment taxes or use the money to keep the doors open. Unfortunately, despite your best intentions to get caught up on payroll taxes, a difficult economy may make that impossible. This can lead to significant tax debt that threatens your business and can even turn into a personal liability against you and your spouse.

As a business owner with W-2 employees, you are required to withhold employment taxes from your employees’ wages. If you fail to pay the employment taxes to the government, and the taxes are left unpaid after notice and demand, pursuant to Internal Revenue Code Section 6672 (IRC §6672), the IRS can assess you personally for the taxes due. This is called the Trust Fund Recovery Penalty (TFRP), or the “100 Percent Penalty.” It effectively allows the IRS to take tax collection action against your personal assets (liens, levies, garnishment of spouse’s wages, seizure of assets, etc.). Any owner, officer, or anyone with signature authority on checks will become personally liable as a “responsible person.” If a responsible person is found to have willfully failed to turn over the taxes, that person will be assessed the TFRP, and be “jointly and severally” liable for the total amount of taxes due — meaning that the IRS can collect 100 percent of the tax liability from any responsible person who has been assessed the TFRP.

If a Revenue Officer is proposing to assess the trust fund recovery penalty against you, it is important to immediately contact our employment tax lawyers as time is of the essence.

At McFarlane Law, PLC, in Scottsdale, Arizona, our employment tax attorneys have years of experience helping owners and officers of small and medium-sized businesses deal with employment tax and Arizona transaction privilege tax (TPT) and use tax issues. We have successfully obtained relief for business owners, officers, and other “responsible persons” who have potential trust fund recovery penalty problems. If tax authorities have begun collection actions against your business (or you personally), our employment tax lawyers can help you seek relief while negotiating a payment plan with the tax authorities. We offer a free initial consultation to discuss your case and map out a reasonable and workable plan.

Independent Contractor vs. Employee Status Classification

If the Internal Revenue Service does not agree with your classification of your workers as an “independent contractor,” the government can reclassify that worker. This can lead to an enormous tax liability, plus penalties and interest.

Our Phoenix-based tax lawyers have handled many such worker classification cases and can help you attain relief from a forced reclassification. We can also help you in dealing with the resulting tax debts arising from such reclassification of workers as employees.